Dependence On Greenback Source Of Indonesia's Vulnerability

Bernama, March 27, 2009 11:03 AM

JAKARTA, March 27 (Bernama) -- The world's dependence on the greenback to conduct international transactions is now seen by some bankers not only as a basic factor contributing to the global financial crisis but also as a source of Indonesia's economic vulnerability, Indonesia's Antara news agency reported Friday.

"The dependence of many countries including Indonesia on the US dollar to make all kinds of international transactions is actually one of the sources of our economic vulnerability," Indonesia's Central Bank Governor Budiono said here recently.

However, according to him, it was difficult for many countries to end their dependence on the greenback in the foreseeable future.

"I think not many countries are able to free themselves from the domination of the US dollar in international transactions," he said.

In Boediono's view, the sources of vulnerability to be faced by remaining dependent on the use of the US dollar is firstly marked by the country's reliance on high US dollar liquidity against the domestic economy or, in other words, the liquidity is restricted by the US economy.

"The amount of available liquidity to make economic transactions depends on the US domestic economy. If that country is reluctant to provide such relaxing liquidity, it will certainly affect the currency of countries fully depending on the greenback often sucked in by the US government under the current circumstances," he said.

Secondly, the dependence will make the exchange rate unstable following the existing sharp depreciation of the currency as a result of economic crisis.

There is a worry in the future that the US dollar will record a sharp decrease following much dollar bailed out by the US government to recover from the ongoing economic crisis.

"The exchange rate of greenback which cannot be predicted in addition to unstable liquidity is also deemed as the cause of vulnerability," Budiono said.

He further said that many developing countries had fallen victims of the greenback's depreciation.

In fact, they never made anything wrong with their economy, but at a sudden there economy deteriorate as a result of unstable condition of greenback like at present time.

In response to this condition, Yuliashar, a high ranking official at BCA bank, said the establishment of the world currency was needed to internationally overcome the constraints being faced.

For example, bilateral trade will no longer affected by the condition of the domestic economy of the United States which tends to create instability to exchange rate.

In addition to the establishment of international currency like special drawing rights (SDR), which could be used for international trade transaction, he also expressed the need to diversify the use of other currency instead of the greenback for international transaction.

Yuliashar further stressed that bilateral swap agreement between Indonesia and China's central bank that was signed on Monday was of many steps that could be taken by Indonesia to reduce this overall dependency on greenback.

"It is dangerous for the world to rely on one or two national currencies to serve global transactions," he said, adding, "With the bilateral swap transaction, settlement between two countries can be directly done without having to convert to US dollars first, thus it can decrease dollar dependency."

According to Yuliashar, the outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system.

Again Boediono reiterated that the current US economic crisis was negatively affecting global liquidity.

"Problems arise when the deleveraging process in the US sucks in and dries up liquidity, hampering trade and investment in other countries," he said.

During his visit to China, both Boediono and his Chinese counterpart Zhou suggested using the IMF's Special Drawing Rights, or SDR, as a super-sovereign reserve currency.

The IMF created the SDR in 1969 as an international reserve asset, but its use is limited.

"However, the problem we have is convincing all countries to accept the SDR as an international currency," Boediono said, adding, "It will take time. Another way is endorsing more national currencies to be used as global currencies."

The central bank governor said it appeared that China was gradually positioning the yuan as an acceptable alternative international currency to the dollar.

He noted that China has also signed swap deals with Malaysia for 80 billion yuan, North Korea for 180 billion yuan, and Hong Kong for 200 billion yuan and even Belarus for 20 billion yuan.

Boediono said China's swap agreement with Indonesia could help decrease dollar demand for imported goods and investment.

He also said trade between the two countries continued to increase, noting that in 2008 total non-oil and gas exports to China totalled $7.77 billion, while imports topped $14.99 billion.

"Based on these amounts, if traders use the swap facility, then US dollar demand will decline significantly," Boediono said, adding, "We already met with traders from China and they are very exited about the agreement."

Currently, Bank Indonesia and the People's Bank of China are drafting regulations for traders who want to use the swap facility. The central bank is also seeking to sign swap agreements with other nations with which Indonesia trades.

At present, Indonesia's foreign exchanges reserves stand at about $53 billion, down from $60.56 billion in July 2008. The reserve is used for money market intervention to stabilize the rupiah, paying for imports and foreign loans.

-- BERNAMA